Trouble ahead for trade credit insurance
The last couple of years have seen a remarkably benign claims environment for trade credit insurance globally. But the outlook for the next year or two is pointing to a difficult time for corporates, with insolvencies and payment delays expected to grow dramatically. Tony Dowding reports.
The latest figures from the members of the International Credit Insurance & Surety Association (ICISA), relating to 2021, show a buoyant trade credit insurance market. Insured exposure increased to €2.7trn in 2021 (€2.4trn in 2020), premium written totalled €7bn in 2021 (from €6.4bn in 2020), while crucially, claims paid decreased by 58% to €1.6bn (€3.9bn in 2020).
Many countries brought in trade credit insurance schemes during the pandemic and fiscal support for companies, which resulted in a lot of companies being artificially kept afloat. The lower level of insolvencies in the last two years saw the claims environment in 2021 described as “incredibly benign” by the Berne Union. As a result, the market softened for longer than expected.
Rates have not been commensurate with the level of risk incurred, say insurers. However, as Frederic Bourgeois, managing director at Coface UK and Ireland, explains: “Risk appetite is starting to change, though very slowly, and we know from experience that some underwriters can change their position rather dramatically as claims start to come in.”
Changing economic picture
As the economic picture rapidly changes, there are many challenges facing corporates, such as inflationary pressures, high energy bills, supply chain disruptions, and rising interest rates and wages. Allianz Trade says global insolvencies are expected to rise by +10% in 2022 and +19% in 2023, catching up with their pre-pandemic levels by the end of next year.
According to Allianz Trade, the current fiscal support is reducing the rise in insolvencies by more than -10pp during 2022 and 2023 for all the largest European economies. Nevertheless, the insurer says that at a global level, half of the countries it analysed have recorded double-digit increases in business insolvencies in the first half of 2022.
It says Europe may be particularly impacted by the surge in insolvencies during the next two years, with rises in France (+46% in 2022; +29% in 2023), the UK (+51%; +10%), Germany (+5%; +17%); Italy will see a rebound of +36% in 2023. In Asia, China is expected to register 15% more insolvencies in 2023 on the back of low growth and limited impact from the monetary and fiscal easing. In the US, Allianz Trade expects an increase of +38% in business insolvencies in 2023 as a result of tighter monetary and financial conditions.
At the moment, insurers say defaults are still benign overall. But Bourgeois believes: “The main question mark is when, not if, defaults increase and how this will materialise across sectors. Globally, after two years of declines, we expect a broad acceleration of business insolvencies.”
Allianz Trade’s economic research department recently showed that government fiscal support in the UK is currently propping up about 4,300 businesses on average between 2022 and 2023, in Germany the figure is 2,600 firms, in France 6,700, Italy 1,900, and Spain 2,100.
Sarah Murrow, CEO Allianz Trade UK and Ireland, says that after two years of declines, the credit insurer expects a broad acceleration of business insolvencies globally. “This is being driven by a couple of key factors, the first being the energy crisis, which is having a significant impact on business profitability and while we’ve seen government support in a number of countries, the reality is governments can only partially offset this increased cost. There have also been unprecedented levels of inflation, and this has triggered higher interest rates and wage bills for businesses to contend with.”
She notes that the UK is expected among the first major European economies to reach pre-pandemic levels of business failures. Data from the UK’s Office for National Statistics data shows that in Q2 2022 for England and Wales, after seasonal adjustment, business failures were 13% higher than Q1 2022 and 81% higher year over year.
Bourgeois says that Europe, including the UK, is where he is starting to see more non-payment notifications. He says in the UK, the level of insolvencies is materially above that of 2019 but this is heavily distorted by government schemes and very small companies that had been set up to benefit from such support.
“The strain on company finances is very real in many sectors though and may lead to more defaults, in particular construction and retail, a phenomenon that can be exacerbated when companies are highly leveraged,” says Bourgeois. “If you look at food retail in the UK for instance, over 25% of the market is provided by companies with very high balance sheet leverage, hence attracting specific scrutiny. Similar situations are at play in other countries although the figures are less extreme.”
As for actual claims, Bourgeois says there has been an increase in claims activity so far in 2022, although still very much below historic trends, but he adds that Coface definitely expects claims to rise into 2023. He notes that there is still a lot of capacity in the market, “but it is fair to point out that for marginal risks, this capacity is reserved for existing clients, hence opportunistic requests will struggle to find sufficient support”.
Murrow says that in general, capacity and pricing conditions remain good for both prospects and customers. But she adds: “The increasing number of challenges that businesses will face from higher energy prices, other input costs and inflationary impacts will increase the level of business insolvencies so this could have an impact on the capacity and pricing that we see in today’s market.”
With the long period of low claims, self-insurance has been on the increase but as risks start to grow, there is likely to be greater demand for credit insurance. “The pressure of self-insurance has not completely abated yet but it has slightly reduced compared to 2021, as a lot of companies are expecting worsening trading conditions and taking advantages of still excellent levels of support and low rates from the insurance industry,” says Bourgeois.
He adds: “Since the summer, the level of activity of new prospects has increased significantly although many of the requests we receive are very selective and thus need to be declined, however we do quote nearly two thirds of the enquiries we receive.”
Murrow explains: “My general feel is that in the second year of the pandemic, into 2021, especially on the SME side, there was probably increased self-insurance activity because of the amount of government stimulus that was flowing into the economy and that created a benign claims environment during the recession, which probably gave especially SMEs a bit more security to self-insure. For larger companies, we don’t see large trends of clients dropping out of credit insurance to self-insure.”
She continues: “I do think businesses are looking to optimise their spend based on their capabilities, which is why maybe some large corporates are looking at excess-of-loss-type solutions where they are willing to take on a higher deductible, for example. So, there are different options for businesses to be able to optimise the use of credit insurance in their business.”
She says that across the industry there’s been generally good retention of clients using credit insurance, so customers that have purchased it during the pandemic continued to purchase it this year. She also points to a renewed interest in credit insurance when compared to the past year, both in terms of credit insurance users that had used it in the past, perhaps during the global financial crisis, but also those that are that are new to market.
“I think there’s two key factors that are driving this interest: economic uncertainties and significant inflation, which is creating a swell-up of credit exposures to levels that businesses are not comfortable with and which they haven’t experienced before,” says Murrow. “This is really prevalent for example in the energy industry where we’ve seen significant price volatility, so this is definitely turning businesses to look at credit insurance.”
The credit insurance sector offers both whole-turnover trade credit insurance policies, which dominate the market and involve credit information services, and single-risk policies. Bourgeois explains that large companies can place risks on a single basis and says there is a market as long as underwriters can find relevant information on the obligors, mostly through public sources.
Murrow notes that large corporates or multinational businesses with in-house credit departments, especially those with a large number of smaller exposures, often seek out a discretionary credit limit based on pre-agreed criteria with the insurer, which is a way for them to qualify credit limits themselves under the policy.
“In terms of the single-risk trend, obviously companies will seek out single risk if there is a specific customer representing a large concentration on their ledger or if there’s a specific transaction or project that requires coverage,” she says. “But I haven’t necessarily seen a trend of businesses moving from multi-buyer or whole-turnover to single-risk coverage. Single coverage is selective risk, so it presents a higher-risk profile than the whole-turnover programme, so oftentimes it is more expensive from a rate perspective.”